1. Dr. Mohammad Shahidehpour
ILLINOIS INSTITUTE OF TECHNOLOGY ELECTRIC POWER AND POWER ELCTRONICS CENTER POWER SYSTEM RESTRUCTURING ELECTRICITY MARKET PLANNING AND OPERATION
Dr. Mohammad Shahidehpour
January 2005

2. Outline SMD for restructuring Power system planning issues
Essence of restructured power systems
SMD for restructuring
Power system planning issues

3. Electric Power Systems
Electricity blackout that cascaded through the Midwest, Canada, and New York was not supposed to happen.
One conclusion is evident: Electricity grid is highly interconnected and interdependent. What happens in Ohio affects New York City and vice versa.
Given this complexity, the electricity system requires carefully planned and consistent market rules governing the use of existing grid.
Engineers have long be aware of these issues
Political, business, and judicial entities are wrangling over who should set the rules and how.

6. Electricity Facts Electricity is a cornerstone of the U.S. economy.
approximately 4% of GDP in the U.S.
In terms of revenue, it surpasses telecommunications, airline, and gas industries.
$1 trillion total asset value
$247 billion annual revenue
Electricity is an essential commodity that has no substitute.
Unlike most commodities, electricity cannot be stored easily, so it must be produced at the same instant it is consumed.

7. Electricity Infrastructure
Electricity infrastructure has made minute provisions to meet the changing needs of the economy.

10. Issues to be Considered
A cascading blackout is not a good thing. However, it brings a few issues to our attention:
Short-term task is to introduce consistent market rules for coordinating the use of current transmission grid.
Long-term grid upgrade. Failure to take action to mitigate transmission bottlenecks could result in further degradation of electricity infrastructure.

11. Natural Monopoly
Electricity services has long been considered by economists to be a natural monopoly.
Natural monopoly exists if one service provider can serve customers more efficiently than competing service providers.
Rationale of electricity industry as natural monopoly
Capital intensive: generating plants, transmission network, and distribution network.
Efficiency: the larger the generating capacity, the more efficient.
Public utility commissions regulated customer prices.

12. Competition Good-natured Competition! technical competition
installing the largest power unit of the day
installing the most efficient generating unit
cooperation
Common views on most political and regulatory issues dealing with electric power were often expressed by a trade association, the Edison Electric Institute.
Creation of an industry-wide R&D organization in 1972, the Electric Power Research Institute, which shared its fruits with all members.
Few secrets existed among utility executives.

13. Natural Monopoly No More…….
Emergence of new technologies challenged the rationale of natural monopoly
Generation
size is not the only determining factor (combined-cycle units)
Transmission and distribution
distributed generation (locally installed wind, photovoltaic)
Superconductors (massive transmission)

14. Competition Business Competition! slashing payrolls
cutting costly "social" programs such as energy efficiency
merging with others in attempts to reduce administrative costs and create synergies for dealing with new rivals
gas and electric companies form new relationships
In such a business competitive environment, managers may communicate with each other as openly as in the 1960s

15. New Technologies
Combined-cycle Units

16. New Technologies Wind Turbine
Fastest growing energy source in the world.
By the end of 2000, total world wind capacity was about 17,000 MW, enough to generate about 34 billion kWh a year.

17. New Technologies Photovoltaic Systems
Photovoltaic (PV) systems make use of solar energy to produce electricity.

18. New Technologies

19. Among the new facilities for managing transmission flows are superconducting and low-cost DC connections as well as FACTS devices for improving the control and stability of transmission grid.

21. on

22. Vertically Integrated Utilities
Monopoly
Manage generation, transmission, and distribution
Customers in service territories
Rates (regulated prices) are set by regulatory organizations

23. Restructuring: What & Why
What is restructuring?
Unbundling of vertically-integrated monopolies into separate generation, transmission and distribution entities.
Increased competition through open access.
What are restructuring goals?
Reduce energy charges through competition.
Customer choices of providers by creating open access.
Level of service reliability can be priced for customers.
Business opportunities for new products and services.

24. New Flavor: IPP

25. Restructuring

26. Generating Companies (GENCOs)
GENCO is an entity that operates and maintains existing generating plants.
Objective of a GENCO is to maximize profits.
take part in various markets
energy market
ancillary services markets
competitive actions
arbitraging
gaming
Responsible for any possible risks.

27. Transmission Companies (TRANSCOs)
TRANSCO transmits electricity using a bulk transmission system.
The use of TRANSCO assets will be under the control of the regional ISO, although the ownership continues to be held by original owners in the vertically integrated structure.
TRANSCO has the role of building, owning, maintaining, and operating the transmission system in a certain geographical region to provide services for maintaining the overall reliability of the electrical system.
Recovery of investment and operating costs
access charges (usually paid by every user within the area)
transmission usage charges (based on line flows contributions)
congestion charges

28. Distribution Companies (DISTCOs)
A DISTCO is an entity that distributes the electricity, through its facilities, to customers in a certain geographical region.
DISTCOs are responsible for building and operating its electric system to maintain a certain degree of reliability and availability.
DISTCOs have the responsibility of responding to distribution network outages and power quality concerns.

29. Other Participants Aggregator
an entity that combines customers into a buying group for buying large blocks of electric power and other services with a cheaper price
Marketer
an entity that buys and re-sells electric power but does not own generating facilities
Customer
end-user of electricity with certain facilities
connected to distribution system, in the case of small customers
connected to transmission system, in the case of bulk customers

30. Restructuring Participants

31. Restructuring is not Deregulation
Restructuring is not synonymous with deregulation.
On the one hand, electricity restructuring means deregulation in terms of prices and the entry of market competitors.
On the other hand, government intervention is likely to continue to ensure the maintenance of socially desirable functions.

32. Restructuring
Restructured Power Industry

33. Restructuring Milestone
Public Utility Regulatory Policy Act (PURPA) (1978)
buying power from non-utility independent power producer (IPP)
promoting renewable energy
Energy Policy Act (1992)
open access to transmission lines
FERC Rule 888 (1996)
utilities to unbundle wholesale generation and transmission services
Transmission companies file open access non-discriminatory tariffs
FERC Rule 889 (1997)
Open Access Same-Time Information System (OASIS): electronic communication system
New classes of entities such as the ISO, IPPs, retailers, users, and those who do not own any power facilities

34. Evolution of Electricity Markets
FERC has struggled with electricity restructuring since the Energy Policy Act of 1992 which required open access to the grid.
In 1996, with great deference to state preferences, the Commission approved the framework for California market.

35. California Market
California was the first state in 1996 to offer competitive generation market.
The California ISO was the second largest control area in the U.S. and the fifth largest in the world (54 GW).
California restructuring required investor-owned utilities to sell their generating assets
Generating companies were required to trade electricity solely with California PX
Experience showed that the California market design was fundamentally flawed.

36. California ISO

37. Lessons from California Restructuring
Minimize reform failures due to missing pieces in the proposed legislation, unreasonable time schedules, possible political interference.
Encourage the participation of private sector.
Reduce bureaucracies at the government level to make it an easy entry for new generating companies.
Allow bilateral agreements between generators and distributors to increase competitive pressures on generators and distributors.

38. Electricity Markets
To fix the dilemma, the Commission let a thousand flowers bloom. Electricity regions could choose their own designs for grid management to support wholesale electricity markets.
Anticipated flowers proved to be expensive weeds.
A seemingly endless delay was exploited by those who opposed transmission open access.

40. Electricity Markets
There have been notable successes, as in Eastern ISOs, as well as notable failures in the West.
Following a false start, the basic electricity market design embraced in the Mid-Atlantic states (PJM, New York, New England) and planned for the Midwest and Canada showed the need for consistent and standard rules.
Standardization is important for reducing "seams" between markets to support non-discriminatory open access.
Standardization by itself is not sufficient for a successful energy market. But we know from both theory and experience that it is necessary.

41. Millennium Order and SMD
Order 2000 (December 1999)
Transmission companies with interstate commerce participate in RTO.
RTOs promote efficiency in electricity markets to ensure that electricity consumers pay the lowest price possible for highly reliable service.
Standard Market Design (July 2002)
Congestion management
Location-based pricing
Financial Transmission Rights
Multi-settlement for Energy
Day-Ahead Market
Real-Time Market

42. Operation of Electricity Markets
ISO
Load Forecasting
Market Forecasting
GENCOs
Load Forecasting
Price Forecasting
Forecasting
Price Forecasting
Forward Market SCUC
Markets
Energy
A/S
Transmission
PBUC
Ancillary Services Auction
Bidding
Strategy
Arbitrage
Market Operation
Congestion Management
Gaming
Transmission Pricing
Asset Valuation & Risk Analysis
Risk
Management
Market Power
Market Monitoring

44. Electricity Market Facts
SMD is the framework for a bid-based, security constrained unit commitment and dispatch based on LMPs.
LMP provides a market stimulus for generation investments.
Creation of financial transmission rights provides further incentives for transmission expansion.
The first market design in PJM was not SMD which failed abruptly.
Market suspended on first hot day in June 1997.
SMD was implemented in April 1998.

45. Current Situation
U.S. electric industry restructuring (as of February 2003)

46. Market Operation: Objective
Two objectives
ensuring a secure operation
facilitating an economical operation
Security! Security! Security!
Security is of utmost importance in all aspects of power system operation.
In a regulated environment, security is ensured by centrally dispatching various committed resources.
In a restructured environment, security could be facilitated by utilizing various services available to the market.

47. Electricity Market Models
PoolCo Model
PoolCo in a centralized marketplace clears the market for buyers and sellers.
ISO produces a single market price
Provides participants with a clear signal (spot price) for consumption and investment decisions.
Market dynamics drive the spot price to a competitive level.

48. Electricity Market Models
Bilateral Contracts Model
Bilateral contracts are agreements between two traders
set contract terms independent of ISO.
The ISO would verify that a sufficient transmission capacity exists to complete transactions and maintain transmission security.
The bilateral contract model is very flexible as trading parties specify their desired contract terms.
Disadvantages: high cost of negotiating and writing contracts, and risk of credit worthiness of counter-parties.

49. Electricity Market Models
Hybrid Model
Combines features of the previous two models.
Utilization of a PoolCo is not obligatory.
Customer are allowed to negotiate energy trade agreements directly with suppliers
Choose to accept power at the spot market price.

50. Independent System Operator (ISO)
A competitive electricity market requires an impartial "traffic cop"
Operate the grid at real-time
Enforce grid reliability.
A False Goal: Minimize the ISO’s footprint: there is an argument that ISO functions should be restricted to reliability and separated from the operation of a wholesale market.
This is a mistake, the “separation fallacy.”
Lack of an efficient pricing scheme could drive the ISO to intervene ever more, but without the tools of the market.
ISO ends up large and intrusive and the market could fail.

51. ISO Structures: MinISO
Focus
transmission security
Basis
coordinated multilateral trade model
Example
the original California ISO
no jurisdiction over forward energy markets
very limited control over actual generating unit scheduling

52. Electricity Market Facts
Recognize the minimum requirements of an ISO
There are certain functions that only the ISO can perform, and these should be done efficiently to support a competitive market.
A well designed ISO, could provide market services for handling the grid complexity
operating a spot market,
providing price signals,
supporting transmission hedges,

53. ISO Structures: MaxISO
Focus
Transmission security as well as market clearing
PX is an independent, non-government and non-profit entity which provides a competitive marketplace by running an auction for trading electricity.
Basis
optimal commitment and power flow model
requires extensive data from market participants
Example
PJM ISO, NY ISO, CA ISO, NGC in the UK

54. Power Market Types energy market ancillary services market
Market types based on traded commodities,
energy market
ancillary services market
transmission market
Market types based on time scales,
forward market
day-ahead
hour-ahead
real-time market

55. Energy Market
Energy market creates a centralized mechanism for competitive trading of electricity.
ISO or PX operates the energy market.
ISO (or PX) accepts demand and generation bids (a price and quantity pair) from market participants and determines MCP at which energy is traded.

56. Ancillary Services Market
Ancillary services support the reliable operation of power systems.

57. Ancillary Services Auction
Ancillary services are cleared sequentially or simultaneously.
Sequential approach
Market is cleared for the highest quality service first.
In each round, market participants rebid their unfulfilled resources.
Participant could modify bids in each new round.
Simultaneous approach
Participants submit all ancillary services bids at once
ISO (or PX) clears the ancillary services market simultaneously for minimizing social costs, minimizing procurement costs, etc.

58. Transmission Market
Transmission network is the key mechanism for competition.
Commodity traded in transmission market is transmission rights,
rights for transferring power through the network (flowgates)
rights to inject power into the network
rights to extract power from the network
Holder of a transmission right can
physically exercise the right (flowgates)
be compensated financially for transferring the right to others
Transmission rights are critical for managing transmission congestion.
participants could hedge congestion charges through congestion credits.

59. Forward and Real-time Market
Forward Market
Day-ahead market for hourly scheduling of resources for following day.
Hour-ahead market is for deviations in the day-ahead schedule.
Energy and ancillary services are traded in forward markets.
Real-time Market
Real-time market is established to meet balancing requirements.
Real-time load, generation, and transmission could differ from forward market schedules.
Real-time market is usually operated by the ISO.

60. Key Components in Market Operation
GENCO
The objective is maximize profit.
Firstly, load forecast.
Secondly, good bidding strategy.
Thirdly, financial and physical risks must be hedged.

61. Key Components in Market Operation
ISO
First, ISO forecasts hourly system loads to guarantee there are enough energy to satisfy loads and ancillary service to ensure reliability.
Second, operation responsibilities of the ISO include energy market, ancillary service market, and transmission market.
ISO must be equipped with powerful tools such as security constrained unit commitment and ancillary services auction.
Third, ISO must be equipped to monitor market power and protect market participants’ right to compete.

62. Infrastructure Investment
Recent blackouts in the United States and the Europe proved:
Social cost of transmission under-investment could exceed transmission over-investment cost.
Substantial increase in consumer costs incurred from transmission capacity shortages.
Under-investment in transmission has negative consequences:
increased energy losses,
higher congestion costs,
higher transmission system maintenance costs,
more frequent transmission-related service interruptions,
increased opportunities for the exercise of market power.

63. Reasons for Under-Investment
Transmission costs one tenth of generation.
why not build enough transmission to mitigate congestion?
Extended periods of uncertainty over energy policies and transmission ownership and operation
Market participants have focused on business opportunities in merchant generation and transmission and energy marketing
Cap on retail energy rates
transmission companies may not recover their investment
Transmission investments are difficult to justify to state regulators
much of the benefits are to accrue over a wide region
customers of the local utility will be paying the costs

64. Market-based Planning
Market-based planning provide signals to investors on where to locate new generation and transmission
Market-based planning could help planners, regulators, and local authorities comprehend the benefits.
Market-based planning could neglect the public value of providing adequate reliability.

65. Market-based Planning Bottlenecks
Traditional integrated planning met the primary objective of balancing generation with load.
Did not address the secondary objective of facilitating competitive electricity markets.
New transmission lines vs. generation expansion
New generation has a small geographic footprint and can be located in areas of minimal opposition.
Transmission rights of way are limited by existing system configuration, prior contacts, environmental and land use issues.
A political jurisdiction along the planned route can veto the plan which would effectively block the planning initiative.

66. Outreach and Public Education
Transmission owner’s good performance in building and operating transmission lines could streamline public understanding.
Increase understanding of those among public and government sectors who do not see any direct benefits from enhancing transmission grid.
Open discussion on transmission project
Transmission benefits and drawbacks

67. Who Should be Responsible?
Which governments -- state or federal -- should set the rules?
Policies at the state level are not the answer. This is a federal issue.
A Compromise between Merchant and Regulated Investment
Regulated transmission investment will be limited to inherently large cases relative to the size of the market where the reasonable implementation will be a single project like a tunnel under a river.
Everything else will be left to the market.

68. Final Notes
At great expense, the United States has gone through multiple experimentations with electricity market designs. It is time to standardize the market design for the benefit of the grid.
2003 blackout emerged broad support for the implementation of changes.
Intensive transmission enhancement and planning over the next two decades could reduce outage costs.
Any transmission investment has the potential of yielding benefits far outweighing investment costs.
Public support for better electricity services is there
Societal savings achieved from more efficient energy use will considerably outweigh additional costs of new technologies.

69. Market Operations in Electric Power Systems Forecasting, Scheduling, and Risk Management

70. Thank you!